Though Hudson City Bancorp Inc. certainly has the financial wherewithal to buy banks, its chief executive, Ronald E. Hermance, has regularly dismissed acquisition speculation by arguing that most buyers want stock, and stock deals would dilute the value of its shares.
Cash deals are another story, though, and on Thursday the Paramus, N.J., company announced it had found a seller willing to do one.
Hudson City, with $28 billion of assets, said that it would acquire the $1.1 billion-asset Sound Federal Bancorp Inc. of White Plains, N.Y., for $265 million.
The buyer, 137 years old, has never bought a banking company.
Mr. Hermance said Sound decided to sell because increasing overhead costs - particularly those associated with regulatory compliance - were making it tougher to generate profits. Sound has pristine credit quality, but its return on average equity for the quarter that ended Dec. 31 was a meager 3.25%.
Plenty of other small banks and thrifts in New York and New Jersey face the same challenges, and many will probably be looking to sell themselves, Mr. Hermance said. But Hudson City would probably buy only under the terms Sound accepted.
"It has to be cash, until …[investors] can give me a little better multiple," he said Thursday in a conference call. (Hudson City's shares trade at about 1.3 times their book value; most bank and thrift stocks trade in excess of two times book.)
The deal would combine two of the New York area's oldest thrifts. Sound was founded in 1891 and, like Hudson, has never strayed from its savings-bank roots.
Sound's willingness to take cash was not the only attraction. The companies are a good fit culturally and operationally, Mr. Hermance said, and each has a loan portfolio that is more than 75% home loans. Moreover, Sound's four-county market is contiguous with Hudson City's, with no overlap.
"This happens to be just plain terrific geography," Mr. Hermance said. Sound "takes us into markets that are even better than the ones we are in today."
Dennis J. Salamone, Hudson City's chief operating officer, said it will retain all 14 of Sound's branches and most, if not all, of its 130 employees.
Hudson City has 90 branches in New York and New Jersey and plans to open at least three this year. Twelve of Sound's branches are in Westchester County, N.Y. and Fairfield County, Conn., two of the wealthiest U.S. counties.
"Ron Hermance knows what he is doing," said Richard D. Weiss, who covers Hudson City for Janney Montgomery Scott LLC in Philadelphia. "Westchester and Fairfield are attractive areas. It is where Hudson City should be, and buying gets them there quicker and better than de novo branching."
Hudson City converted from a mutual holding company to 100% stock ownership in June, raising $3.8 billion. It was the largest bank stock offering in U.S. history, and the seventh-largest here of any kind.
The company has been using the money to build branches on Long Island, east of New York City, and on Staten Island, which is part of the city. It had identified Westchester and Fairfield counties for future branch expansion.
Theodore P. Kovaleff of Sky Capital LLC in New York agreed that it makes more sense to buy than build in those markets. In fact, Mr. Kovaleff said in an interview months ago that Sound would be a good fit for Hudson City.
"Both Westchester and Fairfield already have so many banks …. [and] building new branches might have been too expensive," he said Thursday. "In terms of cost and money and time, this is the right move."
The $265 million price works out to 2.23 times Sound's book value and a whopping 47.1 times its projected 2006 earnings, but Mr. Hermance said the purchase would be accretive in 2007. He predicted that Hudson City would add $800 million of deposits in Sound's markets within 12 months of closing.
The deal is expected to close this summer.
Mr. Hermance declined to discuss details of the negotiations leading up to the deal, but he did disclose that Sound approached Hudson City and talked to other companies as well.
That probably came as little surprise to Sound's analysts. Keefe, Bruyette & Woods Inc. pegged it as a likely seller in a June research report.
Most acquirers' stocks drop the day a deal is announced, but Hudson City's rose slightly to $12.12. Sound's stock soared; it closed at $20.24, up 7.7%.
